Ironically, while President Trump’s platform was initially designed to make America great again, it may be one of the biggest rebalancings of US exceptionalism towards the rest of the world. For instance, current output gauges, such as the Atlanta Fed’s GDPNow estimate, now point to a contraction of the US economy this quarter, since imports have skyrocketed due to tariff fears. At the same time, and for the very same reason, US consumers’ inflation expectations are de-anchored. Over the pond, another piece of evidence of the quoted re-balancing is that European stock markets have been on an impressive winning streak in recent weeks. This may also be due to the fact that the intimidations out of Washington have triggered some animal spirits in Beijing and Brussels.
US tariffs: Erratic policy intimidates
US tariffs continue to unsettle businesses and financial markets. So far, only a 10% tariff on Chinese imports has been imposed, while other tariffs have been threatened. These include a 25% tariff on imports from Mexico and Canada, the US’s largest trading partners. It would increase the annual value of US imports affected by the Trump administration’s tariffs from under USD 500 billion to nearly USD 1500 billion. Additional 10% tariffs on Chinese imports were also threatened to go into effect on 4 March. Tariffs on Mexican and Canadian goods may be delayed, dropped, or reduced, as they are related to US demands to curb immigration and drug trafficking, and are not intended to change trade flows, protectionism, or unfair trade practices. These tariffs are primarily threats, not measures to collect tax revenue.
At the same time, the erratic actions have triggered record high trade uncertainty and rising US import volumes due to potential tariff increases. The Atlanta Fed’s most recent GDPNow growth forecast for the first quarter of 2025 fell from +2.3% to -1.5%, based on higher import estimates. Alternative estimates show a less dramatic adjustment. It is thought that the lag in accounting for expected inventory accumulation in the Atlanta Fed forecast exaggerates the impact on GDP growth. Further tariff threats from Trump are coming. These include announced tariffs on steel and aluminium, and threatened tariffs on copper, which are protectionist and likely to persist. Across-the-board tariffs of 10%–25% remain a threat with a less tangible timeline, while reciprocal tariffs and tariffs designed to prevent US companies from paying the digital services tax are being explored under an executive order.
Geopolitics: Europe taking a leadership role
Last Friday’s meeting between the presidents of the US and Ukraine in the White House will be hard to forget. The so called ‘commodity deal’ was not signed and instead the two sides parted in acrimony. The deal, based on unknown details, was soft and unlikely to have meaningful impact. Ukraine is indeed resource-rich in so called ‘critical minerals’, but the world is not scarce in these commodities today, as the past years’ price collapse in rare earth or lithium confirms. Importantly, without any meaningful production in the past, and the relevant resource ecosystem missing, it is unclear whether Ukraine’s potential supplies can compete on global markets. Moreover, the world’s dependence on China is not about mining but about transforming these critical minerals into batteries or magnets. The deal mentioned neither preferential access to resources for US companies nor revenue sharing with the US government and was thus likely more about the show and the dealmaking itself.
The Munich security conference and last Friday’s shattered signing ceremony showed how US foreign policy has changed. It is now all about the US rather than the West and all about quick wins and staging. There is sufficient common ground to make a ceasefire possible between Ukraine and Russia, but Europe has a say on the matter, given its proximity, its sanctions against Russia, and its funding for Ukraine. Europe cut the energy trade with Russia, not the US. There are at least three main questions we ask ourselves in order to understand the potential ceasefire negotiation pathways going forward. Will Europe pragmatically step-up military support for Ukraine? The events over the weekend point in this direction, helped not least by the recent German election outcome. Will the US ease its sanctions against Russia? So far there has been no indication about what kind of sanctions relief the US government is considering. Any energy sanctions relief would make Russia a more direct competitor of US companies on oil and gas markets.
There are lots of uncertainties in the short term, but they do not alter the known conflicting objectives that undermine any deal’s long-term viability, in particular Russia’s dependence on military threats to remain geopolitically relevant. Our views are unchanged. European defence spending will likely rise, energy supplies are ample irrespective of any ceasefire, Ukrainian reconstruction will be a long-term endeavour without meaningful economic impact in Europe, and the multipolar world order is confirmed.
What does this mean for investors?
If short-term US investor sentiment had not hit ten-year lows only last week, the US exceptionalism rout would have further to go. Given the extremes, some rebound would be quite logical and potentially very revealing of the extent of any further rebalancing ahead. In the meantime, the Swiss Market Index, and European banks have recorded ten consecutive weeks of advances (measured from the opening price). This indicates strong demand and paves the way for more gains. We have also upgraded French equities as policy uncertainty in the country should abate and global luxury demand normalise.
In the currency space, we upgraded the EUR and particularly the JPY forecasts vs the USD, since some further normalisation may be in the cards there too. As for China, this week will be quite telling after the stampede in the run-up to the policy meetings.